Exchange Traded Funds: A Concise Guide to ETFs by Francis Groves

Author:Francis Groves [Groves, Francis]
Language: eng
Format: epub
Tags: Business & Economics, Investments & Securities, General
ISBN: 9781906659141
Google: b8nZAgAAQBAJ
Publisher: HarrimanHouse
Published: 2011-09-15T20:21:54+00:00

The components of ETC returns

The price of the ETC reflects both the spot price of the commodity and the roll-on price of the futures contracts. The only scenario that would allow the index to track the spot price of the commodity fully is the – unlikely – event of a succession of futures contracts changing in price in exactly the same proportion and direction as the spot prices.

There is one further source of return for an ETC, which is the interest earned on the collateral (otherwise known as the collateral yield). Futures contracts are all traded on (futures) exchanges and the exchange acts as a central counterparty for all the futures positions. Futures exchanges use a margin system for payment and the initial margin is typically in the range of 5-15% of the value of the contract. The remainder of the ETC’s funds can be invested, normally in government paper, and this generates another stream of return for the ETC. Total return commodity indices are ones that include the collateral yield in their calculation. [120] ETF Securities, the main European ETC sponsor, tracks total return indices.

There is no collateral yield in the case of precious metal ETCs as the investment is (or should be) fully backed by bullion.

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